BEAT services exception does not require using the transfer-pricing cost method

Plain-English summary

Chief Counsel considered whether a taxpayer must use the services cost method for transfer pricing to claim the services cost method exception from base erosion payments under IRC § 59A(d)(5). The memorandum concluded that the taxpayer may use another permissible IRC § 482 pricing method and still exclude the eligible cost portion of a service payment from base erosion payments. Any markup remains a base erosion payment. The memorandum also warned that transfer-pricing records do not automatically satisfy the separate documentation requirements for the IRC § 59A exception. Those records suffice only if they contain all elements required by Treas. Reg. § 1.59A-3(b)(3)(i)(C), including service descriptions, parties, costs, markup, and allocation methods.

Ruling snapshot

• Question: Must a taxpayer use the Treas. Reg. § 1.482-9 services cost method, and will ordinary transfer-pricing documentation suffice, to claim the IRC § 59A(d)(5) exception?
• Outcome: Advice given
• Key authorities: IRC §§ 59A(d)(5), 482, and 6662(e); Treas. Reg. §§ 1.59A-3(b)(3)(i), 1.482-9, and 1.6662-6

Full text (IRS public release)

     Office of Chief Counsel
     Internal Revenue Service
     memorandum
     Number: 202529008
     Release Date: 7/18/2025
     CC:INTL:B05                                      Third Party Communication: None
     POSTS-117724-23                                  Date of Communication: Not Applicable

UILC: 59A.03-05

date:     June 06, 2025

    to:   Lance Witter
          Supervisory Internal Revenue Agent
          (Large Business & International)

from:     D. Peter Merkel
          Branch Chief, Branch 5
          Associate Chief Counsel
          (International)

subject: Services cost method exception for purposes of section 59A(d)(5)

     This Chief Counsel Advice responds to your request for assistance in determining the
     proper interpretation of legal authorities regarding taxpayers’ selection of a transfer
     pricing method for services other than the services cost method while also excluding
     certain amounts paid for services from base erosion payments under the section
     59A(d)(5) services cost method exception.1 This advice may not be used or cited as
     precedent.

     ISSUES

          1. If a taxpayer does not apply the Treas. Reg. § 1.482-9(b) services cost method to
             determine the appropriate arm’s length price for services rendered to the
             taxpayer by a foreign related party, is the taxpayer able to exclude the cost
             portion of those amounts paid or accrued for services under the section
             59A(d)(5) services cost method exception to base erosion payments (assuming
             the taxpayer is otherwise eligible for the section 59A(d)(5) services cost method
             exception)?



     1 Unless otherwise indicated, all “section” references are to the Internal Revenue Code of 1986 (26

     U.S.C. § 1 et seq.), as amended, (the “Code”) and all regulation references are to the Treasury
     Regulations issued thereunder.

POSTS-117724-23 2

2. If a taxpayer claims the section 59A(d)(5) services cost method exception but
   does not apply the Treas. Reg. § 1.482-9(b) services cost method to determine
   the appropriate arm’s length price, does documentation supporting the section
   482 pricing method applied satisfy the taxpayer’s burden of substantiation under
   the books and records requirements of Treas. Reg. § 1.59A-3(b)(3)(i)(C)?

CONCLUSIONS

1. Yes, neither section 59A(d)(5) nor Treas. Reg. § 1.59A-3(b)(3)(i) requires
   taxpayers to apply the Treas. Reg. § 1.482-9(b) services cost method to be
   eligible for the section 59A(d)(5) services cost method exception.
2. Books and records prepared to document a taxpayer’s section 482 method may
   not satisfy the requirements of Treas. Reg. § 1.59A-3(b)(3)(i)(C), which are
   independent of recordkeeping requirements imposed by other provisions of the
   Code. Records maintained for purposes of avoiding penalties under section
   6662(e)(3) will also satisfy the taxpayer’s recordkeeping obligations under Treas.
   Reg. § 1.59A-3(b)(3)(i)(C) only if they include the mandatory elements
   enumerated in that regulation.

FACTS

Taxpayers have excluded amounts paid or accrued for services rendered by foreign
related parties from their base erosion payments under the section 59A(d)(5) services
cost method exception (“section 59A SCM exception”) but have not applied the Treas.
Reg. § 1.482-9(b) services cost method (“Treas. Reg. § 1.482-9 SCM”) to price these
transactions. The Treas. Reg. § 1.482-9 SCM prices services rendered at cost with no
mark-up. These taxpayers use another method acceptable under section 482, such that
they pay an amount that exceeds the total services costs and take a corresponding
deduction,2 which is greater than they could claim if they had applied the Treas. Reg. §
1.482-9 SCM for purposes of section 482.

LAW

    Section 482 Services Cost Method

The “arm’s length standard” for determining the appropriate amount charged between
commonly controlled taxpayers is met “if the results of the transaction are consistent
with the results that would have been realized if uncontrolled taxpayers had engaged in
the same transaction under the same circumstances.” Treas. Reg. § 1.482-1(b)(1).
Treas. Reg. §§ 1.482-2 through 1.482-7 and 1.482-9 provide methods for determining
arm’s length results. Treas. Reg. § 1.482-1(b)(2)(i).
2 This memorandum does not address whether taxpayers’ payments or accruals constitute arm’s length

amounts. Moreover, the analysis assumes that taxpayers that do not elect to apply the Treas. Reg. §
1.482-9 SCM will pay or accrue arm’s length amounts for services rendered in a controlled transaction
and otherwise comply with section 482 requirements.

POSTS-117724-23 3

Treas. Reg. § 1.482-9(a) enumerates several methods that can be applied to controlled
services transactions to determine an arm’s length result. One method, the Treas. Reg.
§ 1.482-9 SCM, “evaluates whether the amount charged for certain services is arm’s
length by reference to the total services costs . . . with no markup.” Treas. Reg. § 1.482-
9(b)(1). A transaction must meet threshold requirements to be eligible for the Treas.
Reg. § 1.482-9 SCM. Treas. Reg. § 1.482-9(b)(2). Specifically, “[t]o apply the services
cost method to a service . . ., all of the following requirements must be satisfied with
respect to the service”: (i) it must be a covered service; (ii) it may not be a specifically
excluded activity; (iii) “[t]he service is not precluded from constituting a covered service
by the business judgment rule” as defined in the regulation; and (iv) adequate books
and records are maintained as described in the regulation. The “business judgment
rule” limits the services cost method to services that do not “contribute significantly to
key competitive advantages, core capabilities, or fundamental risks of success or failure
in one or more trades or businesses of the controlled group.” Treas. Reg. § 1.482-
9(b)(5).

    Base Erosion Anti-Abuse Tax Overview

The Base Erosion and Anti-Abuse Tax (“BEAT”) is intended to combat tax practices
whereby multinational enterprises erode their U.S. taxable income by shifting profits to
overseas entities.3 To address this, section 59A imposes tax on an alternative tax base
not reduced by certain payments to foreign related parties that would normally be
deductible; there are limited exceptions for certain payments that are not treated as
base erosion payments or creating base erosion tax benefits. “Base erosion payments”
include “any amount paid or accrued by the taxpayer to a [foreign related party] and with
respect to which a deduction is allowable under this chapter.” Section 59A(d)(1). 4 “Base
erosion tax benefit” generally includes any deduction allowed for the taxable year
arising from base erosion payments as defined by section 59A(d)(1). Section
59A(c)(2)(A).

Section 59A(b)(1) limits the imposition of the BEAT to “applicable taxpayers,” which are
defined in section 59A(e) and Treas. Reg. § 1.59A-2(b) as a corporation (subject to
certain exceptions) with (i) average gross receipts above a threshold for the prior three-
year period (on an entity or group basis) and (ii) a “base erosion percentage” (discussed
below) in excess of a certain threshold depending on the type of taxpayer. The “base
erosion minimum tax amount” is the excess of the product of a tax rate (generally 10
percent) and the taxpayer’s modified taxable income over the taxpayer’s regular tax

3 See Pub. L. No. 115-97, sec. 14401(a), 131 Stat. 2054, 2226 (2017).

4 The definition also includes certain other ordinarily deductible payments (or payments that reduce gross

receipts), such as purchases of depreciable property, reinsurance payments, and certain payments to
expatriated entities. Secs. 59A(d)(2)-(4).

POSTS-117724-23 4

liability adjusted for certain credits. Section 59A(b).5 “Modified taxable income” is the
taxpayer’s regular taxable income plus “any base erosion tax benefit with respect to any
base erosion payment” and “the base erosion percentage [defined in section 59A(c)(4)
and Treas. Reg. § 1.59A-4(b)(2)(ii)] of any net operating loss deduction allowed under
section 172 for the taxable year.” Section 59A(c).

    Services Cost Method Exception

Section 59A(d)(5) specifically excludes from the term “base erosion payment”:

    Any amount paid or accrued by a taxpayer for services if—

            (A) such services are services which meet the requirements for eligibility
            for use of the services cost method under section 482 (determined without
            regard to [the business judgment rule]), and

            (B) such amount constitutes the total services cost with no markup
            component.

A taxpayer excludes amounts under the section 59A SCM exception only to the extent
of the total services cost of those services. Treas. Reg. § 1.59A-3(b)(3)(i)(A). Thus, any
amount paid or accrued to a foreign related party for eligible services in excess of the
total services cost—referred to as the “markup component” in section 59A(d)(5)(B)—
remains a base erosion payment. Treas. Reg. § 1.59A-3(b)(3)(i)(A).

Finally, a taxpayer asserting that a payment satisfies the section 59A SCM exception
must maintain adequate records to allow the Commissioner to verify eligibility for this
exception. Treas. Reg. § 1.59A-3(b)(3)(i)(B)(2). The books and records must include
“the amount charged for the services and the total services costs incurred by the
renderer [of the services], . . . a description of the services in question, identification of
the renderer and the recipient of the services, calculation of the amount of profit mark-
up (if any) paid for the services, and sufficient documentation to allow verification of the
methods used to allocate and apportion the costs to the services in question in
accordance with § 1.482-9(k).” Treas. Reg. § 1.59A-3(b)(3)(i)(C).

ANALYSIS

1. Taxpayers may benefit from the section 59A SCM exception without applying the
   Treas. Reg. § 1.482-9 SCM.

5 The tax rate is generally 10 percent for tax years beginning before January 1, 2026, but certain banks

and securities dealers are subject to an eleven percent rate. Compare sec. 59A(b)(1)(A), (2)(A), with sec.
59A(b)(3).

POSTS-117724-23 5

Although the section 59A SCM exception requirements generally cross-reference the
Treas. Reg. § 1.482-9 SCM requirements, section 59A(d)(5) and Treas. Reg. § 1.59A-
3(b)(3)(i) do not require taxpayers to apply the Treas. Reg. § 1.482-9 SCM to a
controlled transaction to benefit from the section 59A SCM exception. Compared to the
Treas. Reg. § 1.482-9 SCM, the section 59A SCM exception broadens the scope of
services eligible for the exception by including services that fail the business judgment
rule. Moreover, taxpayers are eligible for the section 59A SCM exception even if they
pay a mark-up component on those services.6

    Plain Language of Section 59A(d)(5)(A)

Under the plain meaning of “eligible” as used in section 59A(d)(5)(A), the Treas. Reg. §
1.482-9 SCM need not be selected and applied by a taxpayer for that taxpayer to
benefit from the section 59A SCM exception. Eligible is defined as “[f]it and proper to be
selected or to receive a benefit” and does not strictly require actual selection.7 Under a
literal interpretation of the text, the amount paid or accrued for services need only meet
the requirements enumerated under the Treas. Reg. § 1.482-9 SCM (as modified by
section 59A(d)(5)) without necessarily applying them for transfer pricing purposes.8

As further evidence that transactions covered by the section 59A SCM exception need
not be priced under the Treas. Reg. § 1.482-9 SCM, some services ineligible for the
Treas. Reg. § 1.482-9 SCM are covered by the scope of the section 59A SCM
exception. Specifically, services eligible for the section 59A SCM exception may fail the
business judgement rule. Section 59A(d)(5) explicitly excludes amounts paid or accrued
for services from base erosion payments if (i) the services “meet the requirements for
eligibility for use of the services cost method under section 482,” determined without
regard to the business judgment rule; and (ii) “such amount constitutes the total
services cost with no markup component.” The business judgment rule, one element of
the four-part Treas. Reg. § 1.482-9 SCM eligibility test, requires that services priced
under the Treas. Reg. § 1.482-9 SCM not “contribute significantly to fundamental risks
of business success or failure.” Treas. Reg. § 1.482-9(b)(2)(iii). These amounts paid or
accrued for services would necessarily be priced other than under the Treas. Reg. §
1.482-9 SCM.

6 Treas. Reg. § 1.482-9(b)(1).

7 Eligible, Black's Law Dictionary (11th ed. 2019).

8 Congress rejected an earlier version of the BEAT that would have required taxpayers to “elect[] to use a

services cost method for purposes of section 482” to exclude the payment from the tax computation
under the earlier bill draft. Tax Cut and Jobs Act, H.R. 1, 115th Cong. sec. 4303 (Nov. 13, 2017)
(emphasis added) (“The term ‘specified amount’ shall not include . . . in the case of a payor which has
elected to use a services cost method for purposes of section 482, any amount paid or incurred for
services if such amount is the total services cost with no markup.”); H.R. Rep. No. 115-409, at 105, 401
(2017).

POSTS-117724-23 6

    Regulatory Interpretation of Section 59A(d)(5)

Regulatory guidance similarly provides that a taxpayer need not apply the Treas. Reg. §
1.482-9 SCM to claim the section 59A SCM exception. Treas. Reg. § 1.59A-3(b)(3)(i)(A)
states that only “amount[s] paid or accrued to . . . foreign related part[ies] in excess of
the total services cost of services eligible for the services cost method exception (the
mark-up component) remain[] a base erosion payment.” The cost portion of such
amounts are excluded from the definition of base erosion payments.

By defining the section 59A SCM exception to cover transactions even if the amounts
paid or received for services exceed costs, Treas. Reg. § 1.59A-3(b)(3)(i) clearly
contemplates the section 59A SCM exception applies to transactions not priced under
the Treas. Reg. § 1.482-9 SCM. Further reinforcing this, Treas. Reg. § 1.59A-
3(b)(3)(i)(A) coordinates with Treas. Reg. § 1.59A-3(b)(3)(i)(B)(1), which, like the
statute, allows taxpayers to enjoy the benefit of the exception without satisfying the
business judgment rule. Finally, the regulations require that proper documentation
related to the section 59A SCM exception be maintained “regardless of whether the
taxpayer determined its payments for those services based on the services cost
method.” Treas. Reg. § 1.59-3(b)(3)(i)(C).

    Conclusion

The overwhelming weight of authority permits taxpayers to use the section 59A SCM
exception without applying the Treas. Reg. § 1.482-9 SCM for transfer pricing purposes.

2. Taxpayer documentation related to a section 482 method may not satisfy the
   requirements of Treas. Reg. § 1.59A-3(b)(3)(i)(C).

Although taxpayers may maintain records for transfer pricing purposes under section
6662(e) and Treas. Reg. § 1.6662-6(d)(2)(iii) to avoid the potential imposition of
penalties related to transfer pricing, these records alone may not be sufficient to satisfy
the section 59A SCM exception recordkeeping requirements. In such cases, Treas.
Reg. § 1.59A-3(b)(3)(i)(C) requires records that demonstrate “the total amount of costs
that are attributable to each of those services, the method chosen under § 1.482-9(k) to
apportion the costs between the service eligible for the services cost method under this
section and the other service, and the application of that method in calculating the
amount eligible for the [section 59A] services cost method exception.” This may require
additional documentation beyond that which taxpayers must maintain to avoid penalties
under section 6662(e). For example, if the taxpayer selects and applies a comparable
profits method using a profit level indicator other than the ratio of operating profit to total
services costs,9 then a taxpayer’s section 6662(e) documentation may not contain an

9 See Treas. Reg. § 1.482-9(f)(2)(ii) (allowing a comparable profits method using the ratio of operating

profit to total services costs or a profit level indicator provided in § 1.482-5(b)(4)).

POSTS-117724-23 7

apportionment of total services costs as necessary to comply with its obligations under
Treas. Reg. § 1.59A-3(b)(3)(i)(C).

Please call Sarah Ellen Floyd at 202-317-6938 if you have any further questions.